REMAKING THE TAX CODE

Levy hikes on liquor and tobacco and new fees on sug­ary drinks are among pro­pos­als

Honolulu Star-Advertiser - - FRONT PAGE - By Kevin Day­ton kday­ton@starad­ver­tiser.com

Acon­sul­tant hired to study the Hawaii tax code is rec­om­mend­ing a po­ten­tially con­tro­ver­sial pack­age of tax cuts and in­creases as a way of re­bal­anc­ing the state tax sys­tem and po­ten­tially rais­ing hun­dreds of mil­lions of ex­tra tax dol­lars for the state. draft re­port sub­mit­ted by PFM Group Con­sult­ing to the state Tax Re­view Com­mis­sion pro­poses that Hawaii boost its tobacco and liquor taxes, in­crease the sur­charge on rental cars and im­pose new taxes on sug­ary bev­er­ages, med­i­cal mar­i­juana and e-cig­a­rettes.

On the tax-cut­ting side of the ledger, PFM’s draft re­port rec­om­mends mak­ing the state tax sys­tem more pro­gres­sive by in­creas­ing the stan­dard de­duc­tion for Hawaii in­come tax fil­ers, and by dou­bling the state tax credit of­fered to low-in­come tax­pay­ers to off­set the im­pact of the state ex­cise tax on food. The Tax Re­view Com­mis­sion has not yet voted on the con­sul­tant’s rec­om­men­da­tions, which will be fi­nal­ized in a re­port due later this month. But even if the com­mis­sion adopts the PFM pro­pos­als, it is un­clear whether they will gain trac­tion at the state Leg­is­la­ture.

The state Con­sti­tu­tion re­quires that the com­mis­sion con­vene every five years to re­view the state tax code and pro­pose changes to the Leg­is­la­ture, but law­mak­ers have ig­nored com­mis­sion rec­om­men­da­tions in the past.

One im­por­tant con­sid­er­a­tion is that next year will be an elec­tion year, which can be a po­lit­i­cally haz­ardous time to make dra­matic changes in the tax code. Un­der­pin­ning the PFM draft pro­posal is the find­ing that “it is likely that, based on cur­rent fore­casts and likely events, the state will have to gen­er­ate ad­di­tional rev­enue to meet its on­go­ing re­quire­ments” for health cov­er­age for pub­lic work­ers and re­tirees, ac­cord­ing to the draft re­port.

The con­sul­tant made a sim­i­lar find­ing in a study for the Tax Re­view Com­mis­sion in 2012, and state Di­rec­tor of Fi­nance Wes­ley

Machida has said he agrees Hawaii tax col­lec­tions aren’t keep­ing pace with growth in the cost of the state’s pen­sion, health care and other obli­ga­tions to pro­vide ser­vices to the pub­lic.

The pub­lic employees’ health fund had an un­funded li­a­bil­ity cal­cu­lated to be more than $11.7 bil­lion as of June 30, 2015, and the state’s share of that is about $9 bil­lion. The pub­lic work­ers’ pen­sion fund had an un­funded li­a­bil­ity cal­cu­lated to be $12.44 bil­lion as of June 30, 2016.

The Tax Re­view Com­mis­sion in 2012 rec­om­mended the state es­tab­lish a panel sim­i­lar to for­mer Pres­i­dent Barack Obama’s Simp­son-Bowles Com­mis­sion to de­velop rec­om­men­da­tions on pos­si­ble state spend­ing cuts and tax in­creases, but that was never done.

Not every­one is com­fort­able with the fo­cus on tax in­creases. Tax Re­view Com­mis­sion mem­ber Vaughn Cook said in­creas­ing taxes is “one side of the coin,” adding, “That’s one side of how to ad­dress an un­funded li­a­bil­ity. An­other way to ad­dress that is to look at the spend­ing side,” and pos­si­ble spend­ing cuts. Cook em­pha­sized that he is speak­ing for him­self and not for the com­mis­sion.

Se­nate Ways and Means Com­mit­tee Chair­man Dono­van Dela Cruz said in a writ­ten state­ment: “As gov­ern­ment costs con­tinue to rise, in ad­di­tion to our un­funded li­a­bil­i­ties in health care and pen­sions, as well as bil­lions of dol­lars in de­ferred main­te­nance, there will be a need to gen­er­ate more rev­enues to pay for these ser­vices. Cre­at­ing new or in­creas­ing taxes to gen­er­ate ad­di­tional rev­enue is only one ap­proach and should not be con­sid­ered un­til we explore all other meth­ods.

“Be­fore we go back to the tax­payer and ask them to pay more, we should, among other al­ter­na­tives, ex­am­ine our tax col­lec­tion meth­ods and ways to grow our tax base, uti­lize pub­lic-pri­vate part­ner­ships and re­quire ad­di­tional cost-sav­ing mea­sures for gov­ern­ment oper­a­tions,” Dela Cruz said. House Fi­nance Chair­woman Sylvia Luke said law­mak­ers “still have some work in re­struc­tur­ing how we spend monies, and how we can be more trans­par­ent and ef­fi­cient.” “Cou­pled with any kind of large tax in­crease to sup­port gov­ern­ment service, I think we need to have a dis­cus­sion about are these the type of ser­vices that we want to pro­vide,” she said. Luke said she wants to hold a pub­lic hear­ing on the fi­nal re­port and the fi­nal rec­om­men­da­tions by the Tax Re­view Com­mis­sion. Sure to stir con­tro­versy if it ad­vances is a pro­posal to re­duce the in­come tax ex­emp­tion for pen­sions un­der the state tax code. Hawaii does not cur­rently tax pen­sions, which PFM Di­rec­tor Ran­dall Bauer said is “not the norm” be­cause most states tax at least some pen­sion in­come. How­ever, the pen­sion tax is­sue in Hawaii has an in­struc­tive re­cent his­tory that is well known in po­lit­i­cal cir­cles.

For­mer Gov. Neil Aber­crom­bie in 2010 pro­posed tax­ing many pen­sions to help cover a se­vere bud­get short­fall, but the idea was fiercely op­posed by the AARP and quickly re­jected by law­mak­ers. Some ob­servers be­lieve po­lit­i­cal back­lash from that pro­posal contributed to Aber­crom­bie’s loss in the 2014 Demo­cratic pri­mary.

Luke said that un­less it can be demon­strated that very-high-in­come pen­sion­ers are mov­ing to Hawaii to dodge taxes in their home states, “I don’t think the Leg­is­la­ture would be very open to look­ing at this is­sue again.”

Other pro­pos­als by the con­sul­tant may be more vi­able po­lit­i­cally. Law­mak­ers have al­ready been search­ing for ways to col­lect ex­cise taxes on on­line sales, and have de­bated at length var­i­ous plans to col­lect ho­tel taxes on tran­sient va­ca­tion rentals that of­ten do not pay them today.

That ef­fort to tax Airbnb-type va­ca­tion rentals is strongly sup­ported by the ho­tel in­dus­try, and Luke said it is “some­thing that we need to look at.” Of par­tic­u­lar con­cern are com­pa­nies that charge the tax to tourists, but don’t re­mit those col­lec­tions to the state, she said. Law­mak­ers need to be care­ful not to in­ter­fere with the coun­ties’ abil­ity to reg­u­late where tran­sient va­ca­tion rentals op­er­ate, but “I think this is go­ing to con­tinue to be a big prob­lem,” Luke said.

The con­cept of elim­i­nat­ing the state tax write-off for prop­erty tax pay­ments is an­other op­tion, but Luke said law­mak­ers are watch­ing to see what Congress will do with its ef­forts at tax re­form. If Congress elim­i­nates the fed­eral de­duc­tion for prop­erty tax pay­ments and the state then does the same thing, that could be a “dou­ble hit for a lot of the res­i­dents,” she said. Repub­li­can House Mi­nor­ity Floor Leader Gene Ward was crit­i­cal of the draft re­port, say­ing the pro­pos­als for in­creases in so­called “sin taxes” such as taxes on liquor and tobacco have been con­tem­plated by law­mak­ers for the past decade.

“What cre­atively have they done?” Ward asked. “What was new in that re­port that you didn’t know about? They threw the spaghetti against the wall, and what stuck was the shop­ping list that they’ve been putting out year af­ter year. Their job is to be creative and in­no­va­tive.” In­stead of a tax re­view com­mis­sion, Ward said what the state needs is a “spend­ing re­view com­mis­sion” be­cause “that’s where we’ve got the prob­lem.”

The Tax Re­view Com­mis­sion is sched­uled to meet again on Oct. 3, and will hold sev­eral ad­di­tional meet­ings later this year to dis­cuss the fi­nal PFM re­port and other is­sues be­fore it is sched­uled to sub­mit a fi­nal re­port to the state Leg­is­la­ture in De­cem­ber. For more in­for­ma­tion, visit 808ne.ws/ Hawai­iTRC.

PRO­POSAL: New car­bon tax EX­TRA REV­ENUE: $365M AD­VAN­TAGE: Pos­i­tive en­vi­ron­men­tal im­pacts; sta­ble rev­enue source DRAW­BACK:

“Hard sell” po­lit­i­cally; makes tax sys­tem sig­nif­i­cantly more re­gres­sive

Source: PFM Group Con­sult­ing

PRO­POSAL: Im­pose ho­tel room tax on al­ter­na­tive rentals such as Airbnb EX­TRA REV­ENUE: $135.7M AD­VAN­TAGE: Ex­ports tax bur­den to tourists; sig­nif­i­cant rev­enue source DRAW­BACK:

Con­cerns that tax­a­tion could le­git­imize il­le­gal va­ca­tion rentals

PRO­POSAL: New tax on sug­ary bev­er­ages of 1.5 cents per ounce EX­TRA REV­ENUE: $48.8M AD­VAN­TAGE: Po­ten­tial health ben­e­fits; tourists con­trib­ute rev­enue DRAW­BACK:

Re­gres­sive tax; op­posed by strong anti-tax lobby

PRO­POSAL: Elim­i­nate state de­duc­tion for prop­erty taxes paid EX­TRA REV­ENUE: $31M AD­VAN­TAGE: In­creases share of state taxes paid by peo­ple with higher in­comes DRAW­BACK:

Elim­i­nates ben­e­fit for prop­erty own­ers

PRO­POSAL: In­crease ci­garette tax to $4 per pack from $3.20 EX­TRA REV­ENUE: $20.3M AD­VAN­TAGE: Rel­a­tively palat­able po­lit­i­cally; tourists con­trib­ute rev­enue DRAW­BACK:

Hawaii al­ready has fifth high­est ci­garette tax in the na­tion

PRO­POSAL:

In­crease med­i­cal mar­i­juana tax to 15 per­cent from 4 per­cent EX­TRA REV­ENUE: $13.2M AD­VAN­TAGE: Sig­nif­i­cant rev­enue source DRAW­BACK: Some­what re­gres­sive

PRO­POSAL: New tax on va­por/e-cig­a­rettes of 95 per­cent of whole­sale EX­TRA REV­ENUE: $4.5M AD­VAN­TAGE: Rel­a­tively palat­able po­lit­i­cally DRAW­BACK: Low mon­e­tary im­pact

PRO­POSAL: Sig­nif­i­cantly in­crease stan­dard state in­come tax de­duc­tion REV­ENUE LOSS: -$61M Helps make tax AD­VAN­TAGE:sys­tem less re­gres­sive DRAW­BACK: Loss of tax rev­enue PRO­POSAL: Ex­pand ef­forts to col­lect ex­ist­ing ex­cise tax on e-com­merce EX­TRA REV­ENUE: $35M Does not AD­VAN­TAGE:re­quire a new tax DRAW­BACK: Chal­leng­ing to ad­min­is­ter

PRO­POSAL: Tax state and fed­eral pen­sion in­come above $25,000 EX­TRA REV­ENUE: $47.8M AD­VAN­TAGE: Pro­vides a more broad and sta­ble tax base DRAW­BACK:

Con­cerns about im­pact on those on fixed in­comes

PRO­POSAL: Dou­ble re­fund­able food ex­cise tax credit REV­ENUE LOSS: -$25M AD­VAN­TAGE: Eases tax bur­den on the poor, makes sys­tem less re­gres­sive DRAW­BACK:

Loss of tax rev­enue

PRO­POSAL:

In­crease liquor taxes by 10 per­cent EX­TRA REV­ENUE: $5M AD­VAN­TAGE: Rel­a­tively palat­able po­lit­i­cally; tourists con­trib­ute rev­enue DRAW­BACK:

Hawaii al­ready has third high­est beer tax, sev­enth high­est tax on spir­its

PRO­POSAL: In­crease rental car sur­charge to $4 per day from $3 per day EX­TRA REV­ENUE: $18.5M AD­VAN­TAGE: Mostly paid by tourists; easy to ad­min­is­ter DRAW­BACK:

Lo­cal res­i­dents also pay; higher tax could re­duce rentals

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